Housing fading as low-growth trap looms

The October slump in building approvals most likely overstates the steepness of the decline in housing construction - but it's still a decline and it's set to continue.

And that will be a concern for policymakers.

That’s because the surge in building may be well and truly over before the slide in mining investment it was supposed to offset has fully played out.

The 12.6 per cent slump in October took the number of residential building approvals approvals to the lowest level since September 2014, according to figures from the Australian Bureau of Statistics.

Falls of that size are unusual and they tend to be followed by bounces.

Even so, the trend does seem to be downward.

With two months of data yet to come, the December quarter looks as though it will be weakest for approvals since 2014.

The approvals figures came the day after the Housing Industry Association reported a drop in new home sales to a 27-month low.

HIA senior economist Shane Garrett said the number of housing commencements was likely to fall to around 172,000 in 2018/19.

That would be about the same as the average of the past decade but still down by 25 per cent from the peak of 229,404 housing starts in 2015/16.

The HIA’s projected level of starts in 2018/19 is consistent with approvals of around 14,800 per month.

That would be another nine per cent below the 16,279 recorded in October following that steep, and most likely exaggerated, fall.

So the downturn, although apparently already under way, still has a long way to go.

Housing construction has been a welcome addition to economic growth as the mining investment boom has faded and a key player in the "rebalancing" story told by the Reserve Bank and Treasury.

The value of mining sector capital spending fell by an average of 17 per cent per year from its peak in 2012/13 to 2015/16.

Current projections from the ABS point to a fall of about twice that percentage in 2016/17 although, because mining investment has contracted so much, the dollar value of the fall will be less than in 2015/16.

Still, it will be strong drag on economic growth.

And, if the current trend continues, so will the home-building industry.

Accordingly, it seems we have not heard the last of what the OECD in its latest economic update on Tuesday referred to as the "low-growth trap".